Allowing risk management to be an afterthought is too risky and de-risking the supply chain must be an ongoing, C-suite level strategic imperative.
That’s the hard word from Nari Viswanathan, Senior Director, Product Segment Marketing – Supply Chain of Coupa Software, spoke with PASA about risk management strategies procurement professionals can consider – and a risk Management Workflow to embed risk mitigation into supply chain.
Nari says there’s no question that supply chain diversification and resilience have become priorities by necessity, thanks to the disruption of the pandemic – and more recently the war in Ukraine.
He says these are not just priorities for Australian and New Zealand businesses themselves, but also for the respective governments. In early March 2022, the Australian federal government announced expanded financial support options for critical supply chains such as for telecommunications equipment, plastics and PPE. This is in addition to recently announced grants for medicine manufacturing, semiconductors and chemicals for water treatment and agricultural production.
On the other side of things, supply chain disruption has significantly contributed to rising inflation. That was on the mind of New Zealand’s prime minister in the second week of March.
New Zealanders are reportedly dealing with three-decade-high prices across produce, rents and petrol. To help ease these pressures the government is rolling out increases to the minimum wage and family tax credits, and bringing back a winter energy payment.
Funding aside, Supply Chain Fundamentals need to change
With or without support from the public sector, those in procurement, logistics and supply chain management who are struggling to fill up the empty grocery store shelves seen across both countries know the hard work is not over. They are also striving to get the necessary components required for production and construction, and finding it tough to ensure the timely transport of goods into and across the country.
In many cases, even staffing along the supply chain ecosystem is an issue. They know that the complexity introduced by the pandemic only added to challenges that were already in play, such as globalisation, political unrest, changing weather patterns and weather disasters like the recent flooding in various parts of Australia.
To deal with disruption, companies must move on from a traditional focus on cost effectiveness. They are injecting supply chains with options and agility. Suppliers are being assessed, or newly sourced, to meet ESG goals.
Strategies such as lean manufacturing and just-in-time inventory management have been applied to address the balancing act between cost management and maintaining high service levels.
This is why we are raising a red flag: all of these factors have collectively accentuated risk to such a degree that supply chain risk management must be elevated as a business priority. Typically risk management would be left to the CFO or the CPO as they deal with supplier’s financial wherewithal. This approach needs to change.
Risk management strategies must be incorporated into supply chain design. Here’s how.
Four steps for supply chain design with risk in mind
[accordion title=”1: Prioritise Risk Management” load=”hide”]Supply chain executives must partner with the offices of the CFO and CPO to develop a framework for managing supply chain risks, to ensure risk management is a shared priority. But that’s not enough.
Today’s supply chain designers need tools developed to handle uncertainty and risk, run scenarios to proactively identify risk, and generate insights and solutions to mitigate risks. The ability to model real-world complexity is critical to effective risk modelling.
They also need adequate, accurate and real-time data from tight integration with upstream processes like strategic sourcing, procurement and contract management. They need external data, such as from a database that identifies suppliers that will meet ESG goals. Ideally, they should have the ability to draw on intelligence from the procurement community at large.
De-risking the supply chain must be a top-down, prime directive to ensure that the business breaks down silos, updates processes, gains access to the right data and invests in the right technology.
[accordion title=”2. Understand Risk” load=”hide”]Risk is anything that causes a supply chain to be impacted in terms of its performance. It may be internal risk, or it may involve a third party. Risks can be identified as operational or disruptive. For example:
Internal – e.g., A minor quality defect in an internal manufacturing process that could be caught during inspection.
Third-party – e.g., A supplier’s shipment is delayed.
Internal – e.g., A major quality defect was unaddressed and has the potential to cause consumer health issues resulting in a product recall.
Third-party – e.g., Your supplier’s supplier has gone out of business due to regulatory compliance failure.
[accordion title=”3: Address Common Points of Failure ” load=”hide”]The root causes of today’s supply chain challenges have been in the making for years, as potential points of failure have been simmering below the surface. Thanks to the scale and worldwide impact of the Covid-19 pandemic, these issues have been exposed even in supply chains that were designed to withstand a reasonable amount of shock and operational risk.
Organisations must examine their own supply chains to identify and address the following common points of failure:
Focus: Supply chains have long been designed with a heavy focus on cost and service. You’ll need to update to a “quadfecta” of cost, service, resiliency, and sustainability.
Silos: Upstream processes, such as strategic sourcing and supplier risk management, have been siloed for too long. Modern supply chain management and effective spend management require visibility and the sharing of data across the business.
Risk: Risk management has not been sufficiently prioritised. Modern supply chains must be designed to proactively mitigate risk.
4. A risk management workflow you can use
A. MODEL THE SUPPLY CHAIN:
Include all tiers across customers, suppliers, transportation providers, etc. Build in optionality by including alternate suppliers even if products are currently single sourced.
B. MODEL THE RISKS:
Build in risks and their corresponding playbooks. For instance, what is the resolution when a major recall happens?
C. QUALIFY THE RISKS:
Which are acceptable? Which are residual, lower and more manageable? Which are high?
D. IDENTIFY CRITICALITY OF RISK AND QUANTIFY IMPACT:
For example, simulations identify that the node through which the supplier flows materials is in fact a critical one and contributes to 50% of revenue. Clearly, this risk is critical and has to be managed immediately.
E. ENGAGE WITH SUPPLIERS:
Notify each brand-owner of risks so they can engage with suppliers to validate and discuss remediation.
F. IDENTIFY ALTERNATE SUPPLIERS:
A sourcing event is triggered within strategic sourcing to identify possible suppliers within the community to source the required products. Candidate suppliers along with capacity and lead-time information are identified and shared with the design team.
G. MODEL ALTERNATE SUPPLIERS AND PERFORM IMPACT ANALYSIS:
Since the supply chain model has already been designed for optionality, it is a question of loading the new suppliers’ data to simulate the new supply chain structure and flows.
H. IMPLEMENT DE-RISK PLAYBOOK:
This involves a combination of remediation through supplier relationship management capabilities, alternate sourcing with additional suppliers, and restructuring of the supply chain to accommodate.
Proactive risk mitigation is the way forward
There’s no one link in the chain that causes all the disruption being felt around the world.
Geopolitical issues, changing weather patterns, the chip shortage, skills shortages, workforce issues and border closures all contribute to the supply chain challenges that are hammering Australian and New Zealand businesses from retailers through to construction companies. What can be done at a national level, must, to help see citizens and businesses through these difficulties. Technology providers are keen to assist and play our role in supply chain management for a productive future.
Companies require a combination of continuous design to ensure that risks are quantified on an ongoing basis, supplier risk management to identify risks within the extended supply chain, and strategic sourcing to ensure that optionality is engineered structurally within the supplier network.
Effective risk management begins at the top, as a strategic imperative. Proactive risk mitigation begins at the very foundation of your global supply chain network: its design.
Partner content from Coupa.